WAKE-UP CALL FOR COSY CLUB

Auditors rail against the new rule forcing companies to switch audit firms every decade. But a wave of scandals has eroded their argument

Afew years ago, SA’S auditing firms responded with haughty arrogance when the regulator suggested a rule change to ensure companies change auditors every decade or so. Bernard Agulhas, the CEO of the Independent Regulatory Board for Auditors, had suggested that this would be one way to ensure “a new pair of eyes”.

“If auditors aren’t properly independent and are too cosy with their clients, the audit quality will be compromised, and shareholders will not have confidence in the information reported,” Agulhas said.

There’s just no need for mandatory audit firm rotation, the firms replied. “No investors we’ve spoken to believe this is the best way to do things,” said Deloitte, for one.

Executives also came out swinging against the rule. Naspers FD Basil Sgourdos said there was no need to tinker because SA auditors were the best in the world. Well, a wave of accounting scandals has torpedoed that notion.

Deloitte, it turns out, has been auditing Tongaat Hulett since before World War 2, before the National Party instituted apartheid, and before anyone in SA had seen a television. And, it would seem, things got a little too cosy in those 81 years. At least, this is the distinct impression you get from the sombre warning from Tongaat that something went badly wrong, and its accounts “can no longer be relied upon”. The sugar company has now been suspended from trading on the JSE “to protect investors”.

Tongaat insiders say former CEO Peter Staude, who joined the company in 1978 and stayed for decades until retiring last year, unequivocally called the shots. No-one could challenge him: not FD Murray Munro, and not Deloitte.

It turns out that Deloitte signed off Tongaat’s 2018 accounts, which included suspect valuations of sugar cane and land transactions. As a result, Tongaat’s equity is likely to be slashed by between R3.5bn and R4.5bn — and this for a company whose equity was just R14bn last year.

It’s not as if there weren’t red flags at Tongaat, including a disturbing reliance on “profits” from Zimbabwe.

In May 2018, for example, Investec Securities analyst Anthony Geard wrote a 10-page report saying that after “an appalling set of results” Staude should resign. Geard flagged the increased valuations for sugar cane, but pointed out that

despite this, “the sugar unit performed terribly”, with just a 3% earnings before interest and tax. Some pundits saw this as a warning.

Looking at Tongaat’s accounts in retrospect (which is, let’s face it, always much easier), there are a heap of other red flags. For example, in the nine years to 2018, the value of Tongaat’s “standing sugar cane” in SA soared more than

580% to R764m, while the value of all its cane roots grew 215% to R2.8bn. All of which boosted Tongaat’s assets.

One accountant who has studied Tongaat says this means its root value per hectare was R27,869 — more than double what you’d see elsewhere in SA. “The valuation of cane is bread-and-butter stuff. Call the average farmer, and he’ll tell you how to do it. This isn’t complex like Steinhoff,” he says.

Another problem was that Tongaat recognised land sales as income and profit, before it had actually got the money. In 2018, for example, it said it sold 96ha, collecting R1.03bn in the process — of which R661m was profit.

Only, Tongaat struggled to collect those debts. By October 2018, it was owed R1.93bn by debtors for land sales. In other words, it was owed the equivalent of two years of sales.

So why were these recorded as sales, then? Well, Tongaat’s accounting policy said it could do this if the deal was “unconditional and binding”, and the buyer had paid a “meaningful deposit or has made arrangements to secure payment”, among other things. It smacks of the sort of desperation that sets in when your sugar sales are falling but you’ve promised the world to investors.

You could say, in mitigation of the auditors, that it’s just one example. But over at Steinhoff, Deloitte had been auditing the company since 1997 — 22 years. We now know, thanks to forensic auditors, that many of Steinhoff’s accounts, dating to 2009, contained R106bn in “fictitious” transactions.

Commendably, it was Deloitte’s Amsterdam office that refused to sign off on Steinhoff’s 2017 financials after it received a tip-off about forged documents. Deloitte then insisted on a forensic investigation, which is why PWC was hired. Finally, after 17 months, Steinhoff published those accounts a few weeks ago.

But even then, Deloitte fell over itself to say: “We do not express an opinion … we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.” In other words, after waiting for “audited financials”, investors didn’t get any. And this nondecision doesn’t come cheap: Steinhoff paid Deloitte €16m (R266m) for that year. Why, you ask, even have auditors?

There are other instances of shoddy auditing in companies where there is a terrifically long association. The Gupta family, for example, had a 14-year association with KPMG.

Which isn’t to say that rotating auditors is a foolproof solution for accounting shenanigans. Property company Resilient, which has endured its own accounting scandals, swapped from KPMG to Deloitte in 2010, for example. And most auditors would also have been helpless in the face of Markus Jooste’s ingenuity at fiddling even cash flows at Steinhoff. But as one extra line of defence, it doesn’t hurt. Presumably construction company Murray & Roberts thinks so. It announced this week it has decided to “early adopt the audit firm rotation requirements”, so it will replace Deloitte with PWC from 2020. More will follow.

The valuation of cane is bread-andbutter stuff. Call the average farmer, and he’ll tell you how to do it